Liberal Tax Dilemma a Sign of the Times

13 Mar 2016

As Malcolm Turnbull faces the reality of an unpredictable public and an imminent election, he is not finding life all that easy.. Being popular without actual policy had only a short term prospect, and most actual policies that are briefly floated turn out to be fraught one way or another. Step by step he has found it necessary to distance himself from his celebration of innovative possibility in tax matters. First the GST initiatives had to be shelved, then negative gearing of property became a complicated matter in the Liberal Party, so too superannuation reform. The most exciting of times are hardly straight-forward.

By and large this is because of three aspects of reality today. The first two – an intersection between a deteriorating world-economy together with fears and uncertainty circulating in the public related to this deterioration – are existential realities for many in most parts of the world. The circumstances that support the rise of Donald Trump, for example, are alive and well with their own inflections in Australia. The third aspect is the division within the Liberal party itself.

It is arguably a sign of the times that the tax debate for the Liberals has nothing to do with responding to the budget bottom line of the nation – now close to $40 billion per year in deficit and predictably set to worsen. There was an early Abbott/Hockey bravado to get the budget under control even though they had little grasp of the new situation. Now, like most people, the Liberals await a return to budget ‘normality’ for that solution. But given that this was the ‘normality’ generated by the debt delusions of the global money boom, they wait in vain.

This is our new world of dreams (for the public as well as politicians), while the collapse of revenue from tax is our new reality. We can wait for five years to be convinced about this, by which time we will be holding hands with Greece and Japan. But ultimately, with such beliefs and dreams, our new road to Hell will be budget repair only to be achieved by cutting expenditure. An Abbott/Hockey solution delivered by a realistic and smiling Malcolm Turnbull will be the new political reality. Could this be the implicit ‘rationale’ for the popularity of a double dissolution of parliament? Act today because tomorrow will be unspeakable!

But when it comes to tax changes that are revenue neutral – moving tax from one category to another to enhance incentives that help grow the economy, as they say – the Liberals are also up against the wall. For them income tax and company tax are the problems to be fixed. Both of these orientations are legacies of the strategies that emerged in the ’80s, associated with Reagan and Thatcher and the ideas of Hayek, and in general assume the context of globalisation: where companies and individuals seek the lowest rates (this is the incentive today) while no longer making any deeper commitment to the national setting they are nominally attached to. Business immigration, for example, can add to the money pool but fleeting associations with the nation empty out any sense of national coherence. And it would be a brave argument to expect such a commitment from a global corporation.

The other side of this revenue-neutral tax change process is largely threefold: changes to GST, changes to negative gearing of property and changes to superannuation. While superannuation may yet yield some revenue for the tax policy, it is negative gearing that is bringing conflict to the surface in the Liberal Party. This is interesting because of the place property now takes in the global economy.

To see this it is necessary to go behind the deteriorating world economy and delve into how globalisation has worked for thirty years or more. The leap into the global economy that was launched in the 1980s – associated with the de-regulation of financial institutions, the floating of currencies and the collapsing of tariff walls – enhanced capital flows while promoting the long decline of local industry. While an unintended consequence, it triggered both a decline of consumer inflation because of cheaper goods out of emerging markets and, critically, a process of asset inflation which has supported extraordinary and escalating property valuations for this whole period. Capital must either enter emerging markets to engage in manufacturing or go to property investment in order to find adequate returns. As far as the local economy is concerned, property, as never before, lies at the centre of ‘growth’ (i.e. profit) prospects and also attracts investors from overseas.

Anything that brings pressure onto this avenue of profit is likely to encounter an explosion. It is instructive that corrupt practices in the Liberal Party today often hinge around property, property rights and property deals. Negative gearing changes confront a setting that is both predictable and unpredictable, one that is also likely to fall apart one day, depending on how the financial crisis unfolds. Malcolm Turnbull beware! Don’t assume that this kind of excitement can be handled by a rhetorical flourish.

– John Hinkson